Tag Archives: FLSA

February 14, 2019

U.S. DOL Eases Restriction on Tipped Employees

Katarina Harris

By Katarina Harris

Employers in the hospitality industry have long struggled to follow U.S. DOL guidance limiting circumstances under which they may take a “tip credit” toward their employees’ federal minimum wage. New U.S. DOL guidance eases that restriction.

DOL Opinion Letter Retracts “80/20 Rule”

In a new opinion letter released November 8, 2018, the U.S. Department of Labor (DOL) decided to eliminate the “80/20 Rule” which had previously limited employers’ ability to take a “tip credit” toward their employees’ federal minimum wage. This retraction comes as a relief to many employers in the hospitality industry, as the previous rule effectively required employers to track and account for the time their employees spent on non-tipped tasks, such as rolling silverware, filling salt-shakers, and other types of daily “side work.” Under the 80/20 Rule, an employer could not take a tip credit for non-tip-generating duties performed by a tipped employee if the amount of time spent on such duties exceeded twenty percent of the employee’s overall work. Tracking and monitoring this time was a tedious and difficult task for employers, resulting in higher risk from wage and hour lawsuits.

“Dual Job” and “Dual Task” Rules Sowed Confusion

Under the federal Fair Labor Standards Act (FLSA), employers must currently pay employees a minimum wage of $7.25 per hour. State wage and hour laws may impose different and higher minimum wage requirements. However, if an employee qualifies as a “tipped” employee under federal regulations, his or her employer may pay the employee just $2.13 per hour in cash wages and take a “tip credit” arising from the employee’s actual tips to cover the remainder of the federal minimum wage. This credit may total $5.12 per hour.

However, the FLSA distinguishes between tipped employees who perform non-tip-generating duties and those considered to have “dual jobs.” For employers, this distinction is critical to avoiding wage and hour lawsuits. If an employee is employed in both a tipped occupation (e.g., as a server), and in a non-tipped occupation (e.g., as a janitor), for the same employer, the employer may only take the tip credit for that employee’s work in the tipped occupation. For all work performed in the non-tipped occupation, the employer must pay the employee his or her federal minimum wage in cash wages.

The old 80/20 Rule took this functional distinction even further. It effectively distinguished between “dual jobs” and those involving “dual tasks.” Even if a tipped employee was not engaged in a “dual job”—for instance, if he or she worked solely as a server—the employer could still not take a tip credit for any work the employee performed which was related to, but not directed toward, producing tips—at least if the employee spent more than 20% of his or her time on such duties. This was the old 80/20 Rule.

Employers Found “80/20 Rule” Unworkable

Many employers found the old 80/20 Rule burdensome, if not completely unworkable. It effectively required employers to track tipped employees’ time spent on non-tip-generating duties. It also opened the door to wage lawsuits requiring detailed fact-finding in order to reconstruct exactly how much time, minute-by-minute, a tipped employee spent on particular tasks. Even worse, the rule did not specify which tasks were considered “related” to tip-generating occupations, as opposed to constituting distinct, non-tipped work. If a customer dropped silverware on the floor and asked a server for a new set, was the time spent rolling a new set of silverware related to tip-generating work? Would the answer be different if the server rolled extra sets of silverware at the beginning of his or her shift before the first customers arrived? Issues like these created a fertile field for litigation.

New DOL Opinion Letter Revives Old Guidance

In January 2009, the DOL issued an opinion letter which briefly rescinded the 80/20 Rule. However, the DOL retracted this rescission just two months later after a new administration came into office. The 80/20 Rule remained in force at all times thereafter.

In its November 2018 opinion letter, the DOL has now reissued its previous January 2009 guidance rescinding the 80/20 Rule. In this new letter, the DOL acknowledges that its previous guidance created some “confusion and inconsistent application” of the tip credit. The letter also quotes a federal circuit court’s observation that, under the old 80/20 Rule, “nearly every person employed in a tipped occupation could claim a cause of action against his employer if the employer did not keep perpetual surveillance or require them to maintain precise time logs accounting for every minute of their shifts.”

Given the practical difficulties caused by the 80/20 Rule, the DOL announced in its new opinion letter that the agency no longer “intend[s] to place a limitation on the amount of duties related to a tip-producing occupation that may be performed” by a tipped employee, at least if such non-tipped duties are performed “contemporaneously with the duties involving direct service to customers.” The related, but non-tip-producing, duties may also be performed “for a reasonable time immediately before or after” a tipped employee performs his or her direct-service duties without imperiling the credit. For employers, this means no more logging, tracking, and monitoring tipped employees’ daily activities.

The DOL’s new letter also acknowledges the need to provide front-end guidance to employers on which duties are entirely unrelated to tip-producing occupations, and thus not subject to the tip credit. To this end, the letter references a list of “core” and “supplemental” duties for certain tip-producing occupations provided by the Occupational Information Network (O*NET). Employers may consult this list to determinine whether certain tasks are related to tip-producing occupations, in which case they are subject to the tip credit. Conversely, employers may not take the tip credit in relation to any duties which do not appear on this list, unless they are very minimal in duration (i.e., “de minimis”)

Greater Clarity for Hospitality Employers

Although additional uncertainties regarding the tip credit may persist into future—e.g., what is a “reasonable time” immediately before or after a tip-producing activity for purposes of related duties?—the DOL’s new opinion letter provides much-needed guidance to employers in the hospitality industry. Employers need no longer track time spent on tip-producing versus “related” tasks in order to claim the tip credit. Nonetheless, hospitality employers should remain vigilant in distinguishing between “dual jobs,” and those with “dual tasks,” because any time spent in non-tipped occupations remains ineligible for the tip credit. When in doubt, employers should consult experienced employment law counsel for additional guidance.

May 14, 2018

DOL Launches “PAID” Program To Resolve Wage Violations

Brad Cave

By Brad Cave

Workers want to get paid, and the U.S. Department of Labor (DOL) is offering a new way to help make sure they do. The DOL’s Wage and Hour Division (WHD) recently launched the Payroll Audit Independent Determination (PAID) program to help resolve potential minimum wage and overtime disputes without litigation. With a healthy bit of skepticism, employers and their counsel may want to explore this new avenue to resolve inadvertent wage violations.

Wage and hour claims are difficult to resolve because the Fair Labor Standards Act (FLSA) states that an employee cannot waive or release his FLSA rights to minimum wages or overtime through an agreement with the employer, unless it is part of a court-approved or DOL-supervised settlement. Most employers are understandably reluctant to involve the DOL in resolving wage and hour errors because the agency may decide to take other enforcement actions, and nobody wants to be sued for trying to informally resolve the problem directly with your employees, only to have them reject your offer and hire a lawyer. The PAID program may give employers a viable third option for getting into compliance and resolving any outstanding liability to employees.

Here’s a look at the pilot program and its potential benefits and pitfalls.

FLSA-Covered Employers May Participate

The PAID program is open to all employers covered by the FLSA that want to attempt to resolve wage issues quickly and without having to defend claims in court. To participate, an employer must review WHD’s compliance materials (available on its website) and conduct a self-audit of its compensation practices. If the employer discovers any issues, it must specify the potential violations to WHD, identify affected employees and the time periods involved, and calculate the amount of back wages it would owe each employee.

The WHD will evaluate the information provided, contact the employer to seek any additional information needed, and confirm any back wages that are due. The agency then will issue a summary of unpaid wages. It also will provide forms describing settlement terms for each affected employee.

The settlement forms will include a release of claims, limited to the potential violations for which the employer will pay back wages. Each employee must sign a settlement form in order to receive any back pay owed. The employer then will pay the back wages directly to each employee no later than the end of the next full pay period after it receives the summary of unpaid wages. The employer must send proof of payment to the WHD.

Wage Violations Covered By PAID Program

The WHD intends that the PAID program will be used to resolve potential FLSA violations related to overtime and minimum wages. For example, the agency suggests that failure to pay overtime at one-and-one-half times the regular rate of pay, “off-the-clock” work, and misclassification of exempt employees may be appropriate topics for resolution through the program.

Importantly, the PAID program cannot be used if an employer is already facing a WHD investigation for payroll practices, the employer has already been sued, or an attorney or union acting on behalf of employees has threatened a lawsuit or demanded a settlement.

Potential Benefits and Pitfalls of Program

The PAID program will require employers with identified wage violations to pay all back wages due, but the WHD will not assess liquidated damages or civil monetary penalties. As a result, the process can help employers avoid costly litigation. The lack of penalties and litigation fees can be a substantial incentive to take advantage of the pilot program.

On the other hand, settlements with employees who are owed back wages will be limited to the wage issues resolved through the PAID program. That suggests that employees are free to assert additional FLSA violations not addressed through the program as well as state-level wage and hour issues at a later date or in a different forum.

In addition, the program requires participating employers to agree to correct their problematic pay practices at issue going forward. That leaves the door open to potential follow-up by the WHD down the road. Moreover, there do not appear to be any assurances that the WHD will not investigate wider payroll issues at participating companies once it has been alerted to potential self-identified noncompliance. That means the wage violations resolved through the PAID program may be used against an employer should any future FLSA violations be discovered or litigated, resulting in potential willful violations.

Approach Program With Caution

The pilot program will be implemented for approximately six months. The WHD then will evaluate the program and consider future options. For most employers, conducting a self-audit of payroll practices can be worthwhile and may help eliminate potential liability for violations going forward. However, because troublesome details of the program remain unknown, employers should use caution when deciding to utilize this WHD-facilitated resolution process.

April 12, 2018

Salary History Cannot Justify Unequal Pay Between Men and Women, According to Ninth Circuit

Dora Lane

by Dora Lane 

The Ninth Circuit Court of Appeals ruled this week that an employer cannot justify a pay difference between male and female employees performing equal work based on prior salary. Rizo v. Yovino. This is a significant decision that could increase potential liability for Equal Pay Act (EPA) claims for employers with workers in states covered by the Ninth Circuit, namely California, Nevada, Idaho, Montana, Arizona, Oregon, Washington, Alaska, and Hawaii.

Equal Pay Act Requirements 

The EPA was enacted in 1963, amending the Fair Labor Standards Act, to prohibit wage disparities based on sex. In short, it requires that men and women be paid equal pay for equal work regardless of sex. Specifically, the law provides that no employer shall discriminate on the basis of sex in paying wages for equal work on jobs the performance of which requires equal skill, effort, and responsibility, and which are performed under similar working conditions. Exceptions are permitted when wages are made pursuant to a seniority system, a merit system, a system measuring earnings by quantity or quality of production, or a differential based on any other factor other than sex.

Employer’s Pay Policy Added Five Percent to New Hires’ Prior Salary

In the case before the court, Aileen Rizo was hired as a math consultant by the Fresno County Office of Education. Her salary was set according to the County’s Standard Operating Procedure under which a new hire would be paid five percent over his or her prior salary, and placed on a corresponding step of the County’s ten-step salary schedule. Based on Rizo’s prior salary in Arizona, she was placed at step 1 of level 1 on the County’s hiring schedule.

A few years into her employment, Rizo was having lunch with her colleagues and learned that her male counterparts had been subsequently hired as math consultants at higher salary steps. Rizo filed a pay disparity complaint with the County which replied that her pay was set in accordance with its Standard Operating Procedure. Rizo filed a federal lawsuit alleging a violation of the EPA, sex discrimination under Title VII, and related state law claims.

Prior Pay Not A “Factor Other Than Sex”

The County did not dispute that it paid Rizo less than comparable male employees for the same work. Instead, it argued that considering each employee’s prior salary to set wages was a permissible “factor other than sex,” so any resulting wage differential was not in violation of the EPA.

The Ninth Circuit ruled that an employer was not permitted to consider an employee’s prior salary, either by itself or in combination with other factors, when establishing the employee’s wages. The Court specifically stated that “prior salary alone or in combination with other factors cannot justify a wage differential” because prior salary history does not constitute a “factor other than sex” under the EPA’s statutory “catchall” exception. The Court wrote that prior salary is not a legitimate measure of work experience, ability, performance, or any other job-related quality, and that employers must look directly to those underlying factors rather than prior salary when justifying a wage differential between male and female employees doing equal work. Writing for the majority, Judge Reinhardt stated, “To hold otherwise – to allow employers to capitalize on the persistence of the wage gap and perpetuate that gap ad infinitum – would be contrary to the text and history of the Equal Pay Act, and would vitiate the very purpose for which the Act stands.” Read more >>

April 2, 2018

Service Advisors Exempt From Overtime, Says Supreme Court

Brian Mumaugh

 by Brian Mumaugh

In a 5-to-4 decision, the Supreme Court ruled that service advisors at car dealerships are exempt from overtime pay under the Fair Labor Standards Act (FLSA). In an opinion written by Justice Thomas, and joined by Justices Roberts, Kennedy, Alito and Gorsuch, the Court determined that service advisors are salesmen who are primarily engaged in servicing automobiles, putting them within the FLSA exemption language. Encino Motorcars, LLC v. Navarro.

Service Advisors Challenged Exempt Status

In 1961, Congress amended the FLSA to exempt all employees at car dealerships from overtime pay. A few years later in 1966, however, Congress narrowed the car dealership exemption so that it no longer exempted all dealership employees but instead applies only to “any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles, truck, or farm implements, if he is employed by a nonmanufacturing establishment primarily engaged in the business of selling such vehicles or implements to ultimate purchasers” (as currently written). Until 2011, federal courts and the Department of Labor (DOL) interpreted that exemption to apply to service advisors.

In 2011, however, the DOL issued a new rule stating that a service advisor was not a “salesman” under the FLSA exemption. This new interpretation ran contrary to 50-years of precedent and threw auto dealerships a curve ball. In 2012, service advisors at a Mercedes-Benz dealership in Los Angeles sued their employer, alleging that their regular work hours were 7 a.m. to 6 p.m. resulting in a minimum of 55 hours per week for which they were owed overtime pay for all hours over 40 in a work week.

The Mercedes-Benz dealership moved to dismiss the complaint, arguing that service advisors were exempt under the FLSA language, despite the new DOL interpretation. The district court agreed and dismissed the lawsuit. The service advisors appealed and the Ninth Circuit Court of Appeals reversed, relying on the DOL’s 2011 rule. The dealership appealed to the Supreme Court who decided that the DOL’s rule could not be given deference as it was procedurally defective. On remand, the Ninth Circuit again ruled in favor of the service advisors, determining that Congress did not intend to exempt service advisors from overtime, in part because FLSA exemptions should be narrowly construed and the legislative history did not specifically mention service advisors. The case went up to the Supreme Court a second time.

Service Advisors Are Salesmen Engaged in Servicing Automobiles

The Supreme Court looked to the plain meaning of “salesman” as someone who sells goods and services. Because service advisors sell customers services for their vehicles, the Court stated that a service advisor “is obviously a ‘salesman.’”

The Court also decided that service advisors are primarily engaged in servicing automobiles because they are “integral to the servicing process.” The Court acknowledged that service advisors do not physically repair cars, but the justices decided that the phrase “primarily engaged in servicing automobiles” necessarily included individuals who do not physically repair automobiles, including service advisors.

In an interesting passage of the opinion, the Court rejected the Ninth Circuit’s statement that FLSA exemptions should be narrowly construed. Justice Thomas quoted his friend and former colleague, deceased Justice Antonin Scalia, “Because the FLSA gives no ‘textual indication’ that its exemptions should be construed narrowly, ‘there is no reason to give [them] anything other than a fair (rather than a ‘narrow’) interpretation.’” A fair reading of the FLSA, the majority concluded, focuses not only on the overall objective of the law but also on the stated exemptions. And the Court concluded that a fair reading of the automobile salesmen, partsmen, and servicemen exemption is that it covers service advisors.

Dissent Says Overtime Required, Unless Commission Exemption Applies

Justice Ginsburg wrote a dissent with which Justices Breyer, Sotomayor, and Kagan joined, stating that because service advisors neither sell nor repair automobiles, they should not be covered by the auto dealership salesman, partsman, and serviceman exemption. The dissent notes that many positions at dealerships are not covered by the exemption, including painters, upholsterers, bookkeepers, cashiers, purchasing agents, janitors, and shipping and receiving clerks. Consequently, the dissent stated that there are no grounds to add service advisors as a fourth category of dealership workers that are exempt, adding to the three positions explicitly enumerated in the FLSA exemption.

The dissent notes that many dealerships, including the Mercedes-Benz dealership in this case, compensate their service advisors on a primarily sales commission basis. According to the dissent, such commission-based positions could fall within the FLSA overtime exemption that applies to retail and service establishments where employees who receive more than half of their pay through commission are exempt from overtime pay, so long as each employee’s regular rate of pay is more than one-and-one-half times the minimum wage. The dissent concludes that even without the auto salesman, partsman, serviceman exemption at issue, many service advisors compensated on a commission basis would remain ineligible for overtime premium pay under the commission exemption.

Dealerships May Treat Service Advisors As Exempt

As a result of the Court’s ruling, car dealerships may continue to treat their service advisors as exempt from overtime under the FLSA. Dealerships should still review applicable state laws to ensure that the exemption applies under state wage law. It is also a good time to review written job descriptions to include service advisor duties that support their exempt status under this decision.

November 20, 2017

Draw Against Commissions: Keeping FLSA Minimum Wage and Overtime Violations At Bay

By Mark Wiletsky

Paying sales employees on a commission basis can achieve multiple goals. Salespersons have an incentive to increase sales to earn more money while the company sees higher revenues without being locked into a guaranteed pay structure for underperforming employees.

Although various types of commission structures may be used, a common one is a draw against commission. Typically, this type of pay structure means that a sales employee is paid solely on the basis of commissions, but may be advanced a certain amount of money known as a “draw” for weeks in which the employee fails to earn a certain level of commissions. Then, the draw is deducted from future commissions when the employee’s commissions exceed the expected level. It sounds easy, but such arrangements can be fraught with FLSA traps.

Illustrative Case

The Sixth Circuit Court of Appeals (whose decisions apply to Michigan, Ohio, Kentucky, and Tennessee) recently examined an employer’s draw-against-commissions policy to determine whether the policy violated the minimum wage and overtime requirements of the FLSA. In that case, current and former retail and sales employees of hhgregg, Inc. and Gregg Appliances filed a lawsuit claiming that hhgregg’s commission policy violated the FLSA and state law in numerous ways. Here is a summary of the policy at issue:

  • In pay periods when an employee’s earned commissions fell below the minimum wage, the employee would be paid a draw to meet the minimum-wage requirement
  • In a non-overtime week (i.e., the employee worked 40 or fewer hours), the draw equaled the difference between the minimum wage for each hour worked and the amount of commissions actually earned
  • In an overtime week (i.e., the employee worked more than 40 hours), the draw equaled the difference between one and one-half times the minimum wage for each hour worked and the amount of commissions actually earned
  • Draw payments were calculated on a weekly basis
  • The amount of the draw would be deducted from commissions earned in future weeks
  • An employee could be subject to discipline, including termination, if he or she received frequent draws or accumulated a high draw balance
  • Upon termination of employment, an employee with a draw balance was required to immediately pay the company any deficit.

Retail and Service Establishment Exemption

The FLSA exempts retail or service employees from the overtime pay requirement but only if (1) “the regular rate of pay of such employee is in excess of one and one-half times the minimum hourly rate applicable” under the FLSA, and (2) “more than half his compensation . . . represents commissions on goods or services.” This exemption does not relieve employers from meeting minimum wage obligations.

In the hhgregg case, the employer argued that the exemption applied. The Sixth Circuit disagreed, pointing to the allegation that the commission policy paid exactly the minimum hourly rate in a normal, nonovertime week, thereby failing to meet the exemption requirement that it be “in excess of one and one-half times the minimum hourly rate.” Because the exemption didn’t apply, hhgregg could not escape overtime pay obligations.

Deductions of Draws From Future Earnings Was Not An Illegal “Kick Back”

Under the FLSA, when an employee earns less in commissions than was advanced through a draw, the employer may deduct the excess amount from later commissions, if otherwise lawful. In the hhgregg case, the plaintiffs argued that the deductions were not “otherwise lawful” because the draws to meet the minimum wage were not delivered “free and clear,” as is required by DOL regulation. Plaintiffs argued that the draws were loans that the sales persons were expected to repay, functioning as an unlawful “kick back.”

The Sixth Circuit rejected the plaintiffs’ argument, finding that because the employees could keep the full amount of the draw at the time it was “delivered,” it was not an unlawful “kick back.” Thus, deducting the draw payments from future commissions did not violate the “free and clear” regulation.

Immediate Repayment Upon Termination

Plaintiffs alleged that making employees immediately pay the company any deficit in draws upon termination of employment violated the FLSA. On that claim, the Sixth Circuit agreed, at least to the extent of allowing the lawsuit to proceed. The Court looked to hhgregg’s written commission policy to find that the sales employees could reasonably believe that they would be liable to hhgregg for any unearned draw payments at the time of termination. Because that provision could violate the DOL regulation that minimum wage be provided “free and clear,” the Court held that plaintiffs alleged sufficient facts in their complaint to support their claim that the policy violated the FLSA.

Off-The-Clock Work

Plaintiffs further alleged that the company encouraged sales employees to attend required training and store meetings “off the clock” in violation of minimum wage and overtime requirements. Specifically, plaintiffs alleged that hhgregg managers approved of and sometimes encouraged sales persons to work “off the clock” to avoid incurring a higher draw.

hhgregg argued that any practice of off-the-clock work would not violate the FLSA because “by allegedly under-reporting working time in draw weeks and thereby lessening their draw payments, [plaintiffs] increased the amount of commission pay they subsequently received by the same amount.” Therefore, “the ‘off-the-clock’ work allegedly performed did not deprive them of pay; it simply shifted it to a different week.”

The Court rejected the company’s argument. Because the FLSA requires employers to pay the minimum wage for all hours worked on a week-by-week basis, an employer may not “shift” pay for hours worked to a future week. Therefore, the Court ruled that plaintiffs’ claim could continue.

Review Your Commission Policy

This recent draw-against-commission case highlights the FLSA issues that employers may face when implementing commission policies. If you use commission payments for any segment of your workforce, we recommend that you review your policy to confirm that it pays employees for all hours worked (e.g., no “off-the-clock” time). In addition, if you offer a draw against commissions, make certain that it meets your minimum wage and overtime pay obligations. Finally, if you rely on an FLSA exemption, such as the exemption for retail and service establishments, compare your commission policy to the exemption to ensure you meet the exemption test. Because this is a tricky area, consult with experienced counsel to resolve any questions or compliance concerns.

September 12, 2017

Employer May Keep Tips As Long As Employees Are Paid Minimum Wage, According To 10th Circuit

By Brad Cave

By invalidating a U.S. Department of Labor (DOL) regulation that states that tips are the property of employees, the 10th Circuit Court of Appeals (whose opinions apply to Wyoming, Colorado, Utah, Kansas, Oklahoma, and New Mexico) rejected an employee’s wage claim based on her employer’s practice of keeping all tips. But employers in states with an analogous state law governing ownership of tips, such as Wyoming, need to be aware that the 10th Circuit’s ruling may not change how they handle tips.

Caterer Kept Tips But Paid More Than Minimum Wage

Relish Catering regularly receives tips from its customers in the form of a gratuity added to their final catering bill at the end of an event. Relish retains those tips for itself rather than passing them along to its employees who work at the events. However, it pays its employees at or above the federal minimum wage of $7.25 per hour as well as time and a half for overtime and does not rely on any sort of tip credit to meet the minimum wage.

Bridgette Marlow believed Relish was required to turn over her share of the catering tips under the Fair Labor Standards Act (FLSA). Despite making $12 per hour (and $18 per hour for overtime), she sued Relish and Brett Tucker, a manager and part owner of the company, alleging they violated the minimum wage provisions of the FLSA by retaining the tips.

FLSA Restrictions Apply Only When Tip Credit Taken

Marlow argued that by retaining all of the tips, Relish was essentially paying employees below minimum wage. For example, she suggested that if she received her $12 hourly wage but Relish retained $11 in tips for each hour she worked, the result was the same as if Relish turned over all of the tips to her and paid her a $1 hourly wage. In essence, she argued that the company could be paying less than the required amount for tipped employees.

The 10th Circuit didn’t bite on Marlow’s rationale. The Court stated that it doesn’t matter where the money to pay wages comes from so long as the company paid at least the minimum wage required under the FLSA. The Court rejected Marlow’s argument that the FLSA’s tip-credit provision applied to her case because Relish doesn’t take a tip credit.

The FLSA tip-credit provision allows employers of “tipped employees” to pay a reduced hourly wage of $2.13 per hour so long as employees receive sufficient tips to raise their earnings to the $7.25 hourly minimum. But this provision applies only if the employer counts tips toward the minimum wage, said the Court. The tip-credit provision does not apply if the employer doesn’t count tips toward the minimum and instead pays the full hourly minimum wage.

The Court stated that the FLSA tip-credit provision does not require that employers turn over all tips to employee in all circumstances, as Marlow urged. Instead, when an employer doesn’t take the tip credit, the tip-credit provision imposes no restrictions on what it may do with tips as long as it pays an hourly wage above the $7.25.

DOL’s Tip-Ownership Regulation Invalid

Marlow relied extensively on a 2011 DOL regulation that provides:

Tips are the property of the employee whether or not the employer has

taken a tip credit under section 3(m) of the FLSA. The employer is

prohibited from using an employee’s tips, whether or not it has taken a tip

credit, for any reason other than that which is statutorily permitted in

section 3(m): As a credit against its minimum wage obligations to the

employee, or in furtherance of a valid tip pool.

From the language of that regulation, it would seem that Marlow had a valid claim. But the 10th Circuit said not so fast and looked at whether the DOL had the authority to implement the regulation in the first place.

Relying on U.S. Supreme Court precedent, the 10th Circuit pointed out that federal agencies may create rules only to fill “ambiguities” or “gaps” in statutes. In a “friend-of-the-court” brief, the federal government argued that the FLSA is silent on the issue of who “owns” tips when an employer does not take the tip credit, and therefore, the DOL had the authority to create a tip ownership rule to fill in that gap.

Despite the Ninth Circuit’s acceptance of that argument, the 10th Circuit disagreed with it, finding that nothing in the FLSA directs the DOL to regulate the ownership of tips when the employer doesn’t take the tip credit. Because the FLSA limits the tip restrictions to employers who take the tip credit, the DOL lacked the authority to regulate otherwise.

The Court invalidated the DOL’s tip-ownership regulation, finding it was beyond the DOL’s authority, and affirmed the lower court’s judgment in favor of the employer. Marlow v. The New Food Guy, Inc., No. 16-1134 (10th Cir. June 30, 2017). Read more >>

August 31, 2017

Court Invalidates Overtime Rule That Increased Exempt Salary Levels

By Mark Wiletsky 

The Department of Labor (DOL) exceeded its authority when it doubled the minimum salary levels for exempt executive, professional, and administrative employees under the Fair Labor Standards Act (FLSA), ruled federal judge Amos Mazzant of the U.S. District Court for the Eastern District of Texas today. Granting summary judgment in favor of the states and business plaintiffs who challenged the new overtime rule last November, Judge Mazzant determined that the DOL’s new overtime rule “effectively eliminates a consideration of whether an employee performs ‘bona fide executive, administrative, or professional capacity’ duties.”

Exempt Duties Are Part Of The Analysis

Judge Mazzant wrote that although Congress delegated authority to the DOL to define and delimit the white-collar exemptions, Congress was clear when enacting the FLSA that the exemption determination needs to involve a consideration of an employee’s duties, rather than relying on salary alone. He stated that the Obama-era overtime rule that significantly increased the minimum salary levels would result in entire categories of previously exempt employees who perform “bona fide executive, administrative, or professional capacity” duties being denied exempt status simply because they didn’t meet the salary threshold. Consequently, the elimination of an analysis of duties for those who failed to meet the new high salary level was inconsistent with Congressional intent.

A Minimum Salary Level Still Acceptable

When issuing a preliminary injunction last November, Judge Mazzant’s ruling raised the question as to whether any salary threshold could be used as part of the white-collar exemption tests. In his summary judgment order, Judge Mazzant appears to leave the salary-level part of the test stand, writing “[t]he use of a minimum salary level in this manner is consistent with Congress’s intent because salary serves as a defining characteristic when determining who, in good faith, performs actual executive, administrative, or professional capacity duties.” He notes that even though the plain meaning of Section 213(a)(1) does not provide for a salary requirement, the DOL has used a permissible minimum salary level as a test for identifying categories of employees Congress intended to exempt. Citing to a report on the proposed regulations, Judge Mazzant seems to approve of setting that salary level at “somewhere near the lower end of the range of prevailing salaries for these employees.”

No Automatic Increase Mechanism

The ruling also strikes down the mechanism in the DOL’s overtime rule that provided for automatic updates to the exemption’s salary levels every three years. In a cursory paragraph, Judge Mazzant wrote that having found the rule unlawful, the automatic updating mechanism was similarly unlawful.

Back To Square One

Now that the existing, never-implemented rule has been invalidated, the DOL is starting over with revising and updating the overtime exemption rule. The DOL recently published a request for information seeking public input on what the new salary levels should be, how updates should be made, whether duties tests should be changed, and other issues affecting the white-collar exemptions. We will have to see what new proposals the DOL puts out in the months to come. But in the meantime, employers can abandon plans to address the doubled salary thresholds under the Final Rule.

On Another Note, No Pay Data To Be Collected With EEO-1 Reports

In another development, on August 29, 2017, the Office of Management and Budget (OMB) directed the Equal Employment Opportunity Commission (EEOC) to immediately stay the requirement that certain employers provide pay data as part of a new EEO-1 report. The controversial pay-data rule would have required companies with 100 or more employees (and federal contractors with 50 or more employees), to submit the wage and hour information for employees according to race, gender, and ethnicity, with the information being used by the EEOC to analyze pay discrepancies and identify possible Equal Pay Act violations. Because of the stay, covered employers should use the previous EEO-1 form, which still collects data on employee race, ethnicity, and gender by occupational categories. Despite the reprieve for employers on the pay-data rule, EEOC Acting Chair Victoria Lipnic states that her agency remains committed to strongly enforcing federal equal pay laws.

If you have any questions about these new developments, be sure to reach out to the employment counsel with whom you typically work.

May 3, 2017

Is Comp Time Coming To The Private Sector?

By Mark Wiletsky

Employees in the private sector may have the option of earning compensatory time off in lieu of overtime pay for hours worked in excess of forty hours per week. The U.S. House of Representatives recently passed the Working Families Flexibility Act of 2017, H.B. 1180, which would amend the Fair Labor Standards Act (FLSA) to permit employees in the private sector to receive compensatory time off at a rate of not less than one and one-half hours for each hour of overtime worked. The bill now heads to the Senate for consideration.

Eligibility For Comp Time

Under the FLSA, compensatory time in lieu of overtime pay has long been permitted for public sector government employees. But non-government, private sector employees have not had the option of accruing comp time as the FLSA requires that private sector employers compensate overtime only through pay. Under this bill, private sector employees who have worked at least 1,000 hours for their employer during a period of continuous employment with the employer in the previous 12-month period may agree to accrue comp time instead of being paid overtime pay.

Employee Agreement For Comp Time

Under the bill, an employer may provide comp time to employees either (a) in accordance with the provisions of an applicable collective bargaining agreement for union employees, or (b) in accordance with an agreement between a non-union employee and the employer. In the case of non-union employees, the agreement between the employee and the employer must be reached before the overtime work is performed and the agreement must be affirmed by a written or otherwise verifiable record maintained by the employer.

The agreement must specify that the employer has offered and the employee has chosen to receive compensatory time in lieu of monetary overtime compensation. It must also specify that it was entered into knowingly and voluntarily by such employee. Requiring comp time in lieu of overtime pay cannot be a condition of employment.

Limits On And Pay-Out Of Accrued Comp Time

The bill specifies that an employee may not accrue more than 160 hours of comp time. No later than January 31 of each calendar year, the employer must pay out any unused comp time accrued but not used during the previous calendar year (or such other 12-month period as the employer specifies to employees). In addition, at the employer’s option, it may pay out an employee’s unused comp time in excess of 80 hours at any time as long as it provides the employee at least 30-days’ advance notice. An employer may also discontinue offering comp time if it provides employees 30-days’ notice of the discontinuation.

The bill provides that an employee may terminate his or her agreement to accrue comp time instead of receiving overtime pay at any time. In addition, an employee may request in writing that all unused, accrued comp time be paid out to him or her at any time. Upon receipt of the pay-out request, an employer has 30 days to pay out the comp time balance. Upon termination of employment, the employer must pay out any unused comp time to the departing employee. The rate of pay during pay-out shall be the regular rate earned by the employee at the time the comp time was accrued, or the regular rate at the time the employee received payment, whichever is higher.

Employee Use of Comp Time

Under the bill, employers must honor employee requests to use accrued comp time within a reasonable period after the request is made. Employers need not honor a request if the use of comp time would unduly disrupt the operations of the employer. Employers are prohibited from threatening, intimidating, or coercing employees either in their choice in whether to select comp time or overtime pay, or in their use of accrued comp time.

Will It Pass?

The bill passed the House 229-197, largely along party lines with all Democrats and six Republicans voting against it. Reports suggest that although Republicans hold 52 seats in the Senate, they will need at least eight Democrats to vote in favor of the bill to avoid a filibuster. Supporters of the bill urge that it offers workers more flexibility and control over their time off. Those who oppose the bill say it could weaken work protections as it offers a promise of future time off at the expense of working overtime hours for free. This is not the first time that federal comp time legislation has been proposed, so we will have to see if the Senate can line up sufficient votes to pass it this time around. Stay tuned.

December 21, 2016

No Such Thing As A Free Lunch!

Cave_BradBy Brad Cave

Hundreds of hourly employees sued their former employer alleging that they were due additional overtime pay. They asserted that the company failed to include their $35 daily travel meal reimbursement in their regular rate of pay when calculating time-and-one-half, meaning they were paid less overtime than they were due. The Tenth Circuit Court of Appeals, whose decisions apply to Wyoming, Colorado, Oklahoma, Kansas, New Mexico, and Utah, recently analyzed their claim.

Calculating Regular of Pay

The Fair Labor Standards Act (FLSA) requires employers to pay employees at one and one-half times the employee’s “regular rate” of pay for all hours worked in excess of 40 per workweek. An employee’s regular rate of pay includes all remuneration paid to the employee, subject to certain exceptions. If a part of an employee’s pay is left out of the “regular rate” calculation, the employee’s overtime rate will be undervalued.

A large group of former hourly employees for a nationwide seismic-mapping services company filed a lawsuit claiming that the company violated the FLSA by failing to include an established meal allowance, which was paid to employees while traveling, in the employees’ regular rate of pay.  In their collective action, the parties asserted that the company required employees to travel away from home and stay in hotels near remote job sites for four to eight weeks at a time. Employees then typically returned home for about two to four weeks before traveling to another remote location. They often worked more than 40 hours per week while at the remote location, triggering overtime pay.

Per Diem For Meals

The company provided its employees with a $35 per diem for meals for all days at the remote location as well as the days spent traveling to and from the remote job location. The company did not pay the $35 meal reimbursement on days that employees worked from their home location or when food was provided at the remote job site.

Exception To “Regular Rate” For Traveling Expenses

The regular rate of pay generally must be calculated to include all remuneration for services paid to the employee.   One exception to this rule is that employers can exclude from the regular rate all reasonable payments for traveling expenses incurred by an employee in the furtherance of his employer’s interests and properly reimbursable by the employer. The regulations state that this exemption includes the “reasonably approximate amount expended by an employee, who is traveling ‘over the road’ on his employer’s business, for . . . living expenses away from home . . . .” 29 C.F.R. § 778.217(b)(3). The company argued that the $35 meal payments were exempt travel expenses and therefore, need not be included in the calculation of the employees’ regular rate.

Meal Reimbursement Was Exempt Travel Expense

The employees countered by arguing that the $35 payments were not exempt travel expenses because the employees were no longer traveling while they worked at the remote job sites for four to eight weeks at a time. They also argued that the phrase “living expenses” did not include the cost of food. The Tenth Circuit disagreed on both arguments.

The Court reasoned that the employees’ position that they were no longer “traveling over the road” when they reached their remote job site was a “hyper-literal interpretation.” The Court instead read “traveling” more broadly to include not just time in transit, but also time away from home. On the employees’ argument that the cost of food did not qualify as a “living expense,” the Court agreed with prior determinations by the U.S. Department of Labor to find that the cost of food away from home is an additional expense that the employee incurs while traveling for the employer’s benefit and therefore, is a living expense. The Court ruled that the $35 per diem meal reimbursements were exempt travel expenses and need not be included in the employees’ regular rate when determining overtime pay. The Court upheld summary judgment in favor of the company. Sharp v. CGG Land Inc., No. 15-5113 (10th Cir. Nov. 4, 2016). Read more >>

December 1, 2016

DOL Appeals Overtime Rule Injunction: Webinar At Noon (MT) Today

6a013486823d73970c01b8d1dc5d4a970c-120wiBy Mark Wiletsky

On the very day that its final overtime rule was supposed to go into effect, the U.S. Department of Labor filed an appeal of last week’s preliminary injunction that temporarily halted the rule. The appeal will be heard by the Fifth Circuit Court of Appeals, which is located in New Orleans, Louisiana.

Will Appeal Be Expedited?

Appellate rules for the Fifth Circuit permit parties to file a motion for an expedited appeal, which means the appeal would be heard and ruled upon in a much shorter timeframe than normal, e.g., the normal timeframe for an appeal can be a year to 18 months. The court will grant such motion only for good cause. We expect that the DOL might try to expedite its appeal, especially given the change in administration coming in late January. As of this morning, however, there is no indication that the DOL has moved for an expedited appeal, but it is possible that it hasn’t been listed on the docket or otherwise been made public yet.

The DOL could also ask the district court to stay the preliminary injunction pending the appeal – in other words, to allow the new overtime rules to go into effect pending the outcome of the appeal. It is unlikely that the district court judge would grant a stay, but it would be a logical next step. Again, no motion to stay the injunction is yet listed on the court’s docket.

Webinar At Noon To Discuss Injunction and Appeal

Please join our free webinar at noon (MT) today (December 1, 2016) as I discuss what the preliminary injunction of the DOL’s overtime rule and the pending appeal mean for employers. I’ll also discuss options for employers who have been considering, or may even have implemented pay practices in anticipation of the overtime rule changes. Register for the webinar here. We will record the webinar for those unable to attend.